Special Characteristics of Healthcare market

Summary:

Introduction

The Nature of Demand

Expected Behavior of Physician

Product Uncertainty

Supply Conditions

Pricing Practices

Conclusion

Introduction:

Prof. Kenneth Arrow argued that the fundamental feature of healthcare is uncertainty.  

He stated that the distinct economic challenges in healthcare are a response to dealing with the uncertainty. Advancing the work of Selma J. Mushkin, "Towards the definition of Heath Economics (1958)", Arrow highlights how uncertainty shapes the special characteristics of the healthcare market into 5 parts:-

* The Nature of Demand

* Expected behavior of Physician

* Product Uncertainty

* Supply Conditions

* Pricing Conditions.

The Nature of Demand:

The first difference of the nature of demand is that there is irregular and unpredictable demand of heath unlike other economic goods which are steady in origin.

Demand for medical services often involves a significant risk to personal integrity. The risk includes the possibility of death and substantial impairment of normal functioning. 

One prominent concern is the potential for a significant loss or decrease in earning capacity. Example: While risks are not exclusive to medical care, necessities like food can be ensured with adequate income, unlike the guarantee against illness.

Expected Behavior of Physician:

In the realm of healthcare, the expected behavior of medical care providers greatly differs from that of typical businessmen. Physicians are subject to stricter ethical restrictions than other profession.

Medical professionals are expected to prioritize customers welfare over self-interest, unlike typical salesman.

Physicians are supposed to provide advice and treatment recommendations free from self-interest, focusing on objective patient needs. Physicians are trusted experts for certifying illnesses and injuries for various purposes, emphasizing their commitment to conveying accurate information.  

Key distinctions in expected behavior include the absence of advertising and price competition among physician. The provision of many non-profit hospital over for-profit ones suggests a preference against profit motives in healthcare supply.

Product Uncertainty:

Uncertainty about the quality of medical care is exceptionally high compared to other commodities. Predicting recovery from disease is as uncertain as predicting disease occurrence. Unlike most commodities that allow learning from experience, severe illness cases don't offer this luxury due to inexperience. The level of uncertainty in terms of utility variation is much greater in severe medical cases than in infrequent expenses like houses or cars.

This uncertainty in medical care exhibit a unique characteristics- it significantly differs between the patient and the physician. Physicians posses significantly more complex information about treatment consequences than patients, and both parties are aware of this information gap. Its important to note that this information gap concerns the outcomes of purchasing medical care, while the disparity in knowledge about production methods is common in various commodities.

Supply Conditions:

Competitive theory typically dictates that the supply of a commodity depends on the net return compared to alternative resource utilization. However, this competition framework deviates significantly in the context of medical care.

Licensing restrictions exist in the medical profession, limiting entry and increasing healthcare costs, unlike typical competitive markets. This restriction on entry through licensing is not unique to medicine and extends to various other professions. Another noteworthy aspect is the high cost of medical education today, which in many places are primarily subsidized and don't proportionally burden students.

Social non-market forces, whether public or private, strongly influence both the quality and quantity of healthcare supply. Quality control measures, such as licensing laws and medical school standards, constrain the diversity of medical care offerings. Despite the potential for substitution by less trained personnel, highly trained physician maintain a central role in healthcare.

Pricing Conditions:

The medical profession is known for unique pricing practices:

Extensive income-based price discrimination, including providing free or reduced cost services for indigent patients and Historical preference for fee-for-service (patients are billed for each specific service provided by healthcare providers), opposing alternatives like prepayment (such as health insurance plans).

These attitudes distinguish the medical profession from business practices.

The differences in pricing practices have implications for competition and price flexibility i.e.

While price competition is often discouraged among physicians, its more prevalent in other industries and the apparent rigidity of prices in healthcare may not fully represent the flexibility that exist, even though ethical considerations impact price adjustment. 

Conclusion:

Arrow noted the following key characteristics of consumer and provides behavior in healthcare markets as a differentia from other markets.

For Consumers, 

He pointed out that Patients do not behave in the same way as consumers as they cannot 'test' the product before consuming it and consumers of healthcare find it difficult to shop around what medical care is appropriate for their condition.

As consumers, patients know considerably less than sellers, and place trust in the providers of care. In a more general sense, this interdependency extends to people caring about the health of others.

And for Providers, 

Arrow pointed out that "Doctors do not behave in the same way as firms as"

This entry into this 'industry' is restricted by medical licensing regulation. Advertising and overt competition are virtually absent in medical markets. Advice given by the physician is supposed to be completely divorced from self-interest. Treatment is, or atleast is claimed to be important in determining their behavior.